Tagged: innovation

Do patents spur innovation?

In a new paper from the Federal Reserve Bank of St. Louis, Michele Boldrin and David K. Levine explain that there is no empirical evidence that patents serve to increase innovation and productivity. They recommend that the entire patent system be abolished.

They explain that although government-created Schumpeterian monopolies do provide incentives to innovate, those incentives are negated by political rent-seeking.

They argue that the current patent system in place is plagued by problems:

  1. Modern products have so many components from different sources that licensing costs are inefficient
  2. Patents do not function as a substitute for trade secrecy
  3. Patents in no way improve communication about ideas, as if submitting for a patent was somehow a news bulletin for new technologies
  4. The deadweight loss is quite large from patent monopolies, because social loss increases linearly with an increased price, but profits increase only quadratically
  5. The cost of litigation is quite high, and this is a waste of resources
  6. Patent trolling is destructive

Why don’t we need patents?

  1. In most industries, first movers have advantages, enough to extract rents
  2. In new, innovative industries, typically many competitive firms scramble for market share; it’s usually only mature firms that attack competition with patent claims

With the lens of economic analysis, the “patent puzzle” is no puzzle at all,

Increasing IP increases residual R&D expenditure at low level of protection… As IP protection is increased further the residual R&D expenditure levels off then falls. Note that at the lower levels we are probably observing primarily the effect of [foreign direct investment]: among poor countries with low IP protection, increases bring in more foreign investment and in doing so directly raise R&D. In richer countries with high levels of IP, foreign investment is not an issue, and increases in IP have little or no effect on innovation.

What would the world look like without patents? Failing monopolies would not be able to inhibit innovation from their last-ditch challenges to competition, and would close more quickly, thereby freeing up resources for other productive ventures.

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